2018 (10) TMI 1438 - AT - Income Tax

Addition of excess share premium u/s 68 - share premium when receipts of premium over and above the DCF valuation report - whether the Share premium can be considered as income taxable under the Act? - Held that - There is no dispute with regard to the fact that the assessee has received the impugned funds by way of Share Premium on issue of preference shares. In the books of accounts also, the assessee has credited share premium account only with the amount received. The investor has also given the funds only towards share premium. Hence, according to the assessee as well as investor company, the nature of receipt/payment is Share premium on the preference shares. Since the revenue is contending that the nature of excess amount of premium is not proved, we shall examine the meaning or context in which the word nature is used in sec.68 of the Act. The courts have time and again held that if an assessee proves three essential ingredients with regard to cash credits, viz., the identity of the creditor, credit worthiness of the creditor and genuineness of transactions, then the nature and source of cash credit stands proved. In that case, the said cash credit cannot be assessed as income of the assessee. As observed earlier, if any cash credit is offered as income by the assessee himself, the question of applying sec.68 does not arise. The requirement of applying provisions of sec.68 shall arise only if any cash credit is not offered as income by the assessee. There is merit in the contention of the Ld A.R that the share premium amount worked out in the Valuation Certificate is the minimum amount that can be collected by the assessee and hence there is no bar on collecting higher amount as share premium. CIT(A) has rightly observed that there are several factors that are taken into consideration while issuing the equity shares to shareholders/investors, such as Venture capital funds and Private Equity funds. CIT(A) has also noticed that the actual financial results achieved by the assessee has exceeded the financial projections. Accordingly he has held that the premium of ₹ 1030/- was determined between the parties on the basis of commercial considerations and agreed to by them, which cannot be questioned by the tax authorities. It is well settled proposition of law that the AO was not entitled to sit on the arm chair of a businessman and regulate the manner of conducting business. Hence, in our view, the AO was not justified in holding that he will accept the share premium amount only to the extent of Rs,672/- only. Hence the AO was not justified in partially not accepting the share premium and accordingly he could not have doubted the genuineness of transactions on this reason. AO himself has accepted the quantum of share premium in AY 2014-15 and further the actual financial results have far exceeded the financial projections. We also notice from the agreement entered between the parties, the investor is entitled to a particular rate of return in case the call option/put option is exercised. It also provides for the manner of conversion of preference shares into equity shares etc. In any case, the question of present book value shall apply only to equity shares and not to preference shares - Decided in favour of assessee.

Issues Involved:
1. Justification of Share Premium under Section 68 of the Income Tax Act.
2. Applicability of Section 68 to Foreign Direct Investment (FDI).
3. Determination of the "nature" and "source" of cash credits.
4. Relevance of valuation reports and commercial decisions in assessing share premium.
5. Judicial precedents and their applicability.

Detailed Analysis:

1. Justification of Share Premium under Section 68 of the Income Tax Act:
The primary issue in the case was whether the share premium amounting to ?1,030 per share, with a face value of ?10, was justified under Section 68 of the Income Tax Act. The Assessing Officer (AO) contended that the premium should be limited to ?672 per share based on the valuation report, and the excess premium of ?358 per share was unjustified and should be treated as income under Section 68. The AO argued that the assessee failed to prove the "nature" and "source" of the excess premium.

2. Applicability of Section 68 to Foreign Direct Investment (FDI):
The assessee received investment from a Mauritius-based company, NSR PR Mauritius LLC, a SEBI-registered venture capital fund. The AO argued that the exemption under Section 68 for Venture Capital Funds was not applicable as the assessee did not receive funds from a Venture Capital Fund or Company. The assessee contended that the investment was made as per the terms of the investment agreement and RBI guidelines.

3. Determination of the "nature" and "source" of cash credits:
The AO accepted the identity and creditworthiness of the investor and the genuineness of the transactions but questioned the "nature" of the excess premium. The assessee argued that the premium was determined based on commercial considerations and future prospects, and the AO was not justified in questioning the commercial decision.

4. Relevance of valuation reports and commercial decisions in assessing share premium:
The valuation report submitted to the RBI estimated the share value at ?682 per share. The AO used this valuation to justify the premium of ?672 and considered the excess premium as unjustified. The assessee argued that the valuation report provided the minimum value as per RBI guidelines, and there was no bar on collecting a higher premium. The assessee also highlighted that the actual financial results exceeded the projections.

5. Judicial precedents and their applicability:
The case referenced several judicial precedents, including decisions from the Hon'ble Bombay High Court and ITAT. The Tribunal in the case of Green Infra Ltd. held that share premium should be examined under Section 68, and once the assessee proves the identity, creditworthiness, and genuineness, no addition should be made. The Tribunal's decision in the assessee's own case for AY 2011-12 did not consider these precedents. The Hon'ble Bombay High Court in Gagandeep Infrastructure P. Ltd. reiterated that share premium is a capital receipt and should be examined under Section 68.

Conclusion:
The Tribunal concluded that the AO was not justified in questioning the commercial decision of the assessee and the investor. The share premium collected was based on commercial considerations and future prospects, and the AO could not partially accept the premium. The Tribunal upheld the CIT(A)'s decision to delete the addition of ?60.24 crores made by the AO under Section 68. The appeal of the revenue was dismissed, and the order was pronounced on 24.10.2018.

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